LONDON, June 21 (Reuters) – British inflation defied
forecasts of a fall in May and stayed far above price growth in
the United States and elsewhere in Europe, pressuring the Bank
of England to keep on raising interest rates despite the growing
hit to mortgage-holders.
Britain has struggled more than other countries with the
surging cost of food, a shortage of workers to fill jobs and its
heavy reliance on natural gas to generate power and domestic
heating, all of which adds to inflation pressure.
Below is an explanation of Britain’s high inflation problem.
HOW DOES UK INFLATION COMPARE TO OTHER COUNTRIES?
Britain’s consumer price index rose by 8.7% in annual terms
in May, unchanged from April and defying forecasts among
analysts polled by Reuters for a slowdown to 8.4%. Although down
from 11.1% last October, it left the country with the highest
inflation rate among the Group of Seven advanced economies.
WHAT ABOUT CORE INFLATION?
Britain’s measure of underlying inflation that excludes
volatile items, such as energy and food, took investors by
surprise by accelerating for a second month in a row in May,
hitting 7.1%, up from 6.8% in April.
Higher core inflation is seen as a sign that price growth is
more likely to remain persistently high.
Another gauge of underlying price pressure that is watched
closely by the BoE – services price inflation – also rose. Both
increases were the strongest in more than 30 years.
WHY IS FOOD INFLATION SO HIGH IN THE UK?
Britain has had western Europe’s highest rate of inflation
for food, with prices up more than 18% over the past year, down
only slightly from a recent peak of more than 19%, the highest
since 1977.
Freak weather has affected crops around the world, pushing
up prices for many countries. But Britain is the world’s third
largest net importer of food and drink, according to the Food
and Agriculture Organization of the United Nations – behind only
China and Japan – leaving it particularly exposed.
Industry data published on Tuesday showed British grocery
inflation eased slightly for the third month in a row in June.
BoE Governor Andrew Bailey said last month that British food
producers may have locked in higher costs than the BoE had
anticipated, explaining some of its underestimate of inflation.
ENERGY PRICES
Britain is highly reliant on imported gas to generate
electricity, exposing it to the full force of the surge in gas
prices last year after Russia’s invasion of Ukraine.
The way Britain regulates energy prices for domestic and
business users – it announces changes to maximum tariffs on a
quarterly basis – means that international price rises are
slower to push up inflation than in many other countries but
falls are also slower to feed through into bills for users.
IS BREXIT PART OF THE PROBLEM?
Britain voted in 2016 to exit the European Union and it left
the EU’s single market at the start of 2021. Although London and
Brussels have an agreement allowing largely tariff-free trade in
goods, there are barriers to exports and imports in the form of
paperwork which have caused delays and higher costs.
The end of free movement of workers from EU countries has
contributed to a shortage of staff faced by many employers that
is more acute in Britain than in many other economies and which
has pushed up wages and ultimately prices for consumers.
WHAT DO PEOPLE THINK WILL HAPPEN WITH INFLATION?
The British public’s expectations for rising prices have
cooled somewhat in recent months, perhaps the only bright spot
for the BoE as it monitors the risk of an inflation psychology
becoming engrained in consumer behaviour.
But those expectations remain elevated, contributing to wage
growth at levels that makes the BoE uncomfortable about future
inflation pressures.
WHAT IS THE BANK OF ENGLAND LIKELY TO DO?
Investors and analysts responded immediately to Wednesday’s
data by pricing in more interest rate increases than they had
previously been expecting.
Rate futures showed investors saw a roughly 40% chance that
the BoE will raise rates by half a percentage point to 5.0% on
Thursday and a 60% chance of rates reaching 6% by December.
(Writing by William Schomberg; Editing by Catherine Evans)
